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Introduction

Thank you for taking the time to look at our Ultimate Guide to Umbrella Companies. With the demand for payroll providers increasing, we decided that it is important contractors and freelancers understand Umbrella Companies so that if they need to use one in the future, they know what to expect.

Umbrella Companies - An Overview

Umbrella companies are generally regarded as the easiest method for temporary workers to get paid – but do you know how they work?

An umbrella company is a PAYE payroll provider for contractors and freelancers. When you register with an umbrella company, you become an employee of theirs and will get paid via PAYE – just as if you were in a permanent role. You will work for your end client as normal but will be required to send your signed timesheets to your umbrella company – so that they know how much to pay you. You will then receive your salary, minus tax, National Insurance Contributions (NICs) and a few additional deductions.

Don’t believe the negative press

There is often a misconception that umbrella companies are confusing and sometimes unethical. Providing you choose a compliant provider, you have absolutely nothing to worry about. One of the most important things to remember about umbrella companies is that providing they are compliant, your take home pay should never really vary – regardless of the umbrella company you use.

The only deduction on your payslip that will vary amongst providers is the umbrella company margin (the financial amount they deduct to cover the administration of conducting your payroll). The margin that umbrella companies charge will typically be between £15 and £30 per week.

It is also worth remembering, some leading umbrellas offer more than just payroll and their service may include free insurance cover, Same Day Faster Payments, exclusive discount plans, and more!

Why do recruitment agencies require temporary workers to use umbrella companies? 

Recruitment agencies will often require their candidates to work via an umbrella, rather than pay them directly through their own company’s PAYE. This is because umbrella companies can offer additional extras that may be required in order for their candidates to do their job, such as insurance.

Initially, registering with an umbrella company may sound stressful, but providing you are speaking to respectable and established firms, you can be signed up and ready to go in little over 10 minutes.

You may be better suited to a limited company

Umbrella companies are the easiest way for contractors to get paid, but not necessarily the most tax efficient. If you are a contractor or freelancer working outside of IR35 legislation, it may be more beneficial for you to set up and become the director of your own limited company. More information on IR35 legislation (also known as off-payroll) is available further on in this guide.

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All the information you’ll ever need

Our Ultimate Guide to Umbrella Companies has been created to provide contractors and freelancers with all the information they’ll ever need about umbrella companies. If you have any additional questions about umbrella companies, please give our friendly team a call on 01707 871622 and we’ll be happy to help.

How do umbrella companies work?

Umbrella companies are often seen as being confusing and a complicated option to use if you are not familiar with how they work. However, using an umbrella company is the easiest and most hassle-free way to get paid as a contractor or freelancer.

So how does an umbrella company work? Below is a breakdown of how umbrella companies work and the roles of you (the contractor or freelancer), your umbrella company (such as Churchill Knight Umbrella), your recruitment agency and your client.

Who enters into an overarching agreement?

When you work through an umbrella company, you, your recruitment agency, end client, and umbrella company enter into an agreement. Your client will pay your recruitment agency your salary and this will then be transferred from the agency to your umbrella company. Your umbrella company will make all the relevant tax and National Insurance Contributions (NICs) deductions and pay your net salary directly into your bank account.

Registering with an umbrella company

Registering with an umbrella company could not be easier. Contact the umbrella company and let them know that you are considering signing up to their service. If you have any queries, they will be happy to answer them before you begin the sign-up process.

The whole process should take no longer than 15 minutes and can be done over the phone or via an online form.  

Churchill Knight Umbrella How Do Umbrella Companies Work

Welcome to your umbrella company

Once you have completed the sign-up process, you will receive a welcome email from your umbrella company. This will explain the next steps you need to take in order to get set up successfully and receive your pay on time.

The umbrella company is now seen as your employer

When you sign up to an umbrella company, they will be seen as your employer – for tax purposes. You will be paid via Pay As You Earn (PAYE), exactly the same as someone who is employed on a full-time basis. The umbrella company must follow HMRC’s tax rules and regulations and will make the deductions from your salary accordingly. You will also receive a payslip which will show what deductions have been made – similar to a permanent employee.

Complete your timesheets and submit them

One of the benefits of working through an umbrella company in comparison to setting up your own limited company is that there is very little ongoing administration involved.

To ensure you receive your salary on time you will need to submit a timesheet to your recruitment agency or umbrella company, every week. Make sure the timesheet clearly shows the hours you have worked and is signed. You will then need to send your timesheet to your recruitment agency and umbrella.

What happens after you submit your timesheets?

There are two processes that can happen after you submit your timesheets in order for your payment to be processed and for you to be paid.

The first process is self-billing and this is the most popular payment structure that agencies adopt. It standardises their processes and leaves very little room for error because the timesheets and payment information are all pre-approved. As part of a self-billing arrangement, once your timesheets have been submitted to your recruitment agency and signed by your end client, your agency will produce a self-billed remittance. The self-billed remittance will detail when and how much you are due to be paid and this will be sent to your umbrella company who will then pay you.

The second process is non-self-billing and this requires you to send your timesheets to both your recruitment agency and umbrella company. Once your timesheets have been received by your umbrella company, they will raise an invoice to your agency. Your recruitment agency (who will already have raised an invoice to your client) will send your pay to your umbrella company. Once your umbrella company has received your salary, they will pay it into your bank account.

Your umbrella company will make the relevant deductions

Your chosen umbrella company will process the payment once it has been received from your recruitment agency and will make the relevant deductions. The deductions are the umbrella company’s margin, tax, National Insurance and Apprenticeship Levy contributions.

You will now be paid and receive your payslip

After your umbrella company has received your pay from your recruitment agency, they will make the relevant tax and NI deductions, and pay your net salary directly into your bank account. You will also receive a payslip which will show you exactly what deductions have been made and how much you are due to receive.

Umbrella companies can offer you more than just a payroll service 

Umbrella companies can offer more than just a payroll processing service and added extras vary from provider to provider. Common benefits include:

  • Employee benefits – Maternity Pay, Paternity Pay, Sick Pay and Holiday Pay
  • Free insurance – Employers Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance

Additionally, as a Churchill Knight employee you will also receive:

  • Access to Churchill Knight Rewards – an employee reward scheme which gives you access to thousands of online and high street discounts which will save you money when you shop and eat out.
  • No hidden fees or tie in periods – you only pay for our service when you use it and not the weeks that you don’t.

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What do I need to do if I register with an umbrella company?

Umbrella companies employ contractors using Contracts of Employment which means the umbrella company is seen as your employer – despite you not directly working for them. This means the umbrella company is responsible for issuing invoices for the work you do for your client, calculating and paying your tax on your behalf and paying your salary into your bank account (via PAYE).

Submit your timesheets each week

As an umbrella employee, you are required to submit a timesheet each week which shows all the hours that you have worked. This will need to be signed by your line manager or client. It will also show any expenses you are entitled to claim. Your umbrella company will invoice your client/agent for the work you have done. Once you have submitted your timesheet, you can sit back and relax!

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What is supervision, direction, or control?

Supervision, Direction and Control (SDC) was brought in to limit the number of umbrella contractors able to claim subsistence and travel expenses. The legislation came into effect on 6th April 2016. Continue reading for a breakdown of what SDC is and to discover whether or not you are subject to it.

 

Please note – it is unlikely that contractors and freelancers are not subject to SDC, and therefore, many compliant umbrella companies will not allow anyone to claim travel and subsistence expenses anymore. 

 

What does SDC stand for?

The following definitions for Supervision, Direction and Control are:

  • Supervision – Someone is monitoring and overseeing the work you are doing to ensure it is completed to the required standard. It is also considered supervision if someone is helping you in order to develop your knowledge and skills.
  • Direction – Someone is giving instructions or guidance as to how the work should be carried out. Someone giving direction is also often coordinating the work.
  • Control – Someone is dictating how the work should be carried out and what work needs to be done. This also includes having the ability to move a contractor from one job to another.

What does SDC mean for contractors?

The legislation was brought into effect because HMRC believed there were contractors taking advantage of tax benefits working through umbrella companies, when in fact they were being treated the same as employees in permanent positions. The contractors claiming tax relief were deemed to be the same as permanent employees but had access to unfair tax benefits. Therefore, HMRC introduced SDC to stop this abuse. The introduction of SDC has meant a substantial decrease in the number of contractors working through umbrella companies and being able to claim relief on subsistence and travel expenses.

Subsistence expensesChurchill Knight Umbrella Travel Expenses

Subsistence expenses include:

  • Food and drink
  • Accommodation

These may be incurred when you are on a business trip and it is likely you will abide by a pre-arranged limit agreement with your client. This will be in accordance with HMRC’s benchmarks.

Travel expenses

If you are able to claim travel expenses you will be able to claim for the following:

  • Journeys to and from a worksite (excluding your normal commute)
  • Travel between a temporary worksite and your home
  • Travel which is required for you to do your assignment

How do you assess your SDC status?

When you register with an umbrella company, they will offer you advice as to whether or not you are affected by SDC. If they believe you are not subject to SDC you will be asked to complete another more thorough questionnaire to accurately determine your status.

What happens if you are subject to SDC?

Unfortunately, if you are subject to SDC it means you are unable to claim tax relief on any subsistence or travel expenses. However, if you are a mobile worker, you may be able to claim some travel expenses for traveling between temporary worksites.

Why should you still consider using operating through an umbrella company?

Whilst it is still true that contracting through a limited company is the best way to maximise your take home pay (depending on your personal circumstances) there are lots of benefits for contractors working through an umbrella company (depending on your chosen provider):

  • Free insurance – Professional Indemnity insurance, Public Liability insurance, and Employers Liability insurance
  • Access to employee benefits – Annual Leave, Maternity and Paternity Pay, Sick Pay
  • Minimal ongoing administration – you just have to submit your weekly timesheets to your umbrella company
  • Compliant umbrella companies will deduct the correct amount of tax and National Insurance Contributions
  • Dedicated Account Management – Ensuring communication is easy

Can I claim expenses?

Remember – you need to check with your umbrella company to see if you are able to claim travel and subsistence expenses.

How do you know if an umbrella company is compliant?

Contractors who do not have a good understanding of HMRC’s tax rules and regulations are being caught out by non-compliant umbrella companies who are claiming they can retain up to 90% of their salary after tax deductions. However, this is simply not possible if the company is compliant. With lots of different payroll providers available, how do you know which companies are safe to use?

Compliant umbrella companies follow HMRC’s tax rules and regulations

As you are seen as an employee, it means you will be taxed similarly to a permanent employee. Income Tax is applied to your salary depending on the tax bracket you fall into at either a basic rate (20%), higher rate (40%), or additional rate (45%) on all income you receive above the personal allowance. National Insurance Contributions (NICs) are also due on all earnings above £162 per week – at 12%. This means you can expect to retain 60-70% of your earnings. You will receive a payslip which will show you all the deductions that have been made and how much you will be paid into your bank account.

Checklist to make sure your umbrella company is compliant

It is extremely important that you use a HMRC compliant umbrella company or accountant to ensure you pay the correct amount of tax. Otherwise, you could be seen as committing tax avoidance/evasion and you will be required to pay back all of the tax that you owe, as well as facing penalties and unlimited fines.

Use the checklist below when deciding which payroll provider or contractor accountant to use:

  • Make sure that they are owned and run by industry professionals who have plenty of experience and knowledge about the contractor market.
  • Check that they have a good reputation within the industry.
  • Do they offer realistic take home pay projections that are HMRC compliant?
  • Can they provide you with important information about how to legally comply with UK tax laws and regulations – specifically those relating to contractors?
  • Are they fully compliant with HMRC and have a 100% compliance record?
  • Make sure they have not been assigned a Scheme Reference Number (SRN).
  • Make sure they do not try and make you claim excessive expenses.
  • Do all of the umbrella company’s activities take place in the UK?
  • Do they work with other companies in the industry (such as advisors and insurance providers) who have also got positive reputations?
  • Are they accredited by reputable professional bodies, such as Professional Passport?

Churchill Knight Umbrella How Do You Know If An Umbrella Company Is Compliant

Tax avoidance is serious...

Using a non-compliant umbrella company could land you in serious trouble with HMRC and you may be required to pay back every penny of tax they believe you have under-paid?

How to spot a tax avoidance scheme

A contractor who operates through a legitimate and compliant umbrella company can expect to retain 60-70% of their salary after the relevant tax and National Insurance Contributions (NICs) have been made. If a company is claiming you can retain up to 90% of your salary, it is most likely a tax avoidance scheme and you should avoid it at all costs.

What is a tax avoidance scheme?

A tax avoidance scheme operates with the sole intention of maximising contractors’ take home pay as a result of paying lower amounts of tax and NICs. Umbrella companies that promote tax avoidance schemes claim that tax regulations do not apply to the different payment options as salaries are sent via credit, loan schemes or something similar. However, this is not the case according to HMRC as the payments are no different to normal income and therefore tax and NICs still apply.

We have outlined a few examples of some of the most common types of tax avoidance schemes:

  • Job boards – the contractor will receive a minimum wage and tax and NI deductions will be applied to this. They will then receive the rest of their salary as loyalty points for a job board, which they can exchange for tax-free cash.
  • Pension schemes – part of the contractor’s salary is sent overseas and paid into a pension pot. The full amount can be collected (tax-free) at a later date.
  • Loan Schemes – contractors will receive a minimum wage salary which will have tax and NICs deducted, and then they will receive the rest of their salary as a tax-free loan. These are unethical because the loans are not expected to be paid back.

On a payslip, the larger payments which are shown as something other than pay (job boards, pension schemes, loan schemes) will likely be coming from overseas and from a different bank account to the smaller payments (pay). Therefore, only a small amount of the contractor’s salary is being taxed and the rest is not. In the eyes of HMRC, this is tax avoidance.

How to spot a tax avoidance scheme 

There are a few tell-tale signs which will help you to spot a tax avoidance scheme:

  • The company’s registered address is outside of the UK.
  • The company claims that payment via a loan scheme, job board points, pension scheme of refunded credit is not subject to tax and NI deductions.
  • You will be paid a small amount of your salary with the tax and NI deductions applied and the rest in something other than regular pay which will not be taxed.
  • The company claims that you can legally take home up to 90% of your salary after tax and NI deductions have been made.

Churchill Knight Umbrella How To Spot A Tax Avoidance Scheme

Why are tax avoidance schemes not compliant?

If you are using a compliant umbrella company you can expect to take home 60-70% of your salary after the correct deductions have been made. This is because the basic rate of Income Tax is 20% and NICs are also due on all earnings above £162 per week at 12%. Therefore, if you are being quoted take home pay in excess of 70%, the umbrella company is probably not legitimate.

Penalties for using a tax avoidance scheme

If HMRC discovers that you have been using a tax avoidance scheme, you could face possible fines and you will be required to pay back all of the tax that HMRC deems you to owe.

2019 Loan Charge

The 2019 Loan Charge grants HMRC the ability to punish contractors retrospectively for using disguised remuneration agreements dating back to 1999. Disguised remuneration schemes were recommended by many payroll providers and agencies at the time and involve an employee being paid indirectly through a third-party company in the form of an offshore intermediary.

What should you do if you are currently using a tax avoidance scheme?

If you think you might be using a tax avoidance scheme or may have used one in the past, you need to withdraw from it immediately. You should also report it to HMRC. This will avoid any further penalties or additional interest being charged.

If you would like any further information about tax avoidance schemes please visit the Churchill Knight Umbrella’s blog. Additionally, HMRC’s website also has plenty of information.

The dangers of using a non-compliant payroll provider

The 2019 Loan Charge was introduced as a way for HMRC to recoup tax that has been avoided by contractors who have used disguised remuneration schemes as far back as the 6th April 1999.

What is a disguised remuneration scheme?

A disguised remuneration scheme involves an employer paying a worker indirectly through a third-party company (umbrella company), often in the form of an offshore trust. Often the worker would receive a small amount of their salary which would be liable to tax and National Insurance Contributions and the rest would be paid via a loan or some other non-taxable distribution which disguises the payment of income. These loan schemes were recommended at the time by many payroll providers.

The 2019 Loan Charge

The government announced in the 2016 Budget that it would apply a tax charge to any outstanding disguised remuneration loans. HMRC has announced that it is aware of 50,000 workers who have used disguised remuneration schemes and, in some cases, up to two decades worth of tax bills are owed.

What happens if HMRC believes you have been using a disguised remuneration scheme

It is likely you will have to pay back all of the tax that HMRC believes you owe as well as additional penalties in the form of late payment interest. You may also be found to owe National Insurance and Inheritance Tax and will have to pay it back where applicable. All loans will be lumped together and taxed at the current rate instead of the rate at the time you entered into the loan.

You can settle your tax affairs

If you are currently using a disguised remuneration scheme or have used one as far back as the 6th April 1999 you have the option to settle your tax affairs before the 5th April 2019. You should contact HMRC immediately as it may be possible to reach a settlement agreement before the Loan Charge is introduced.

This is only applicable until the 6th April 2019 when the Loan Charge is introduced and you should seek legal advice after this time.

Settlement terms could include:

  • Late payment interest – which can be applied to all years where HMRC has enquired, or may currently be enquiring, on your tax affairs.
  • Income tax on the combined net amount of all the disguised remuneration loans you used.
  • Inheritance Tax and other penalties where applicable.
  • NICs if you are or were a self-employed contractor.

How to settle your tax affairs before the Loan Charge is implemented:

  • Register to settle your tax affairs – If you choose to settle, your income that you earned whilst using a disguised remuneration scheme will be taxed by the rates used in the relevant years, rather than being taxed at the current rate of tax.
  • Repay the loan before the charge is implemented.

Churchill-Knight-Umbrella-Non-Compliant-Payroll-Providers

Seek advice

If you think you will be affected by the Loan Charge and want to fully understand your options it is advised that you seek legal advice. There are specialist law firms and tax experts who can provide you with the appropriate guidance.

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You can count on our expert team

Churchill Knight Umbrella operates in full compliance with HMRC tax laws and has never promoted an offshore scheme. 

The advantages of using an umbrella company

Choosing whether to set up your own limited company or sign up to an umbrella company can be a difficult decision to make, especially if you are new to contracting and are unsure which is the more suitable option for you. Umbrella companies are the easiest way for contractors to get paid and it is extremely easy to get set up and ready to go.

Continue reading to discover the advantages of operating through an umbrella company, and to gain a better understanding of whether it is the right option for you.

Advantages

  • You only pay the umbrella company margin for the weeks that you work. When you are not working, you do not have to pay. Whereas working through a limited company you would have to pay your accountant regardless, although it may be a reduced fee.
  • Registration is simple and you can be signed up over the phone or via an online form in a matter of minutes.
  • No joining fees, exit fees or tie in periods.
  • If you are working on a short-term contract, working in the public sector or are receiving an hourly rate of £15 or less, an umbrella company is possibly the best option for you!
  • You may be required by your end client or recruitment agency to use an umbrella company.
  • Working through an umbrella company will give you a full payslip history where everything is seen as a salary and can be provided as references for credit e.g. loans or a mortgage.
  • Most legitimate umbrella companies offer Professional Indemnity insurance, as well as Public Liability insurance and Employers Liability insurance – for free!
  • If you are unsure whether contracting is for you, or if you are just starting out as a contractor, working via an umbrella company offers a low-risk way to try it out. You can form a limited company at a later date or return to full-time employment – depending on what you want to do.
  • There is very little ongoing administration, as the umbrella company takes care of most of it, including invoicing and processing payroll. All you have to do is complete and send your signed timesheets (and expenses if applicable) to your umbrella company or recruitment agency.
  • Continuity of employment – if you are working multiple contracts alongside each other you will be still be seen as one employee of your umbrella company and therefore your tax code won’t be affected and you won’t be overtaxed.
  • Umbrella companies can be used for any industry, contract role or level of experience.
  • When you sign up to an umbrella company you will get statutory benefits similar to permanent employees – Paternity Pay, Maternity Pay, Annual Leave and Sick Pay.
  • You are able to claim tax relief on subsistence and travel expenses if you are not subject to supervision, direction or control, or are a mobile worker.

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The disadvantages of using an umbrella company

Whilst there are plenty of advantages to operating through an umbrella company, unfortunately, there are also a few disadvantages.

 

Disadvantages

  • When you work through an umbrella company all your income is paid as a salary and the umbrella company will deduct Income Tax, NICs and their margin. Therefore, umbrella companies do not have the same tax benefits that limited companies do.
  • Working through an umbrella company gives you less control over your financial affairs compared to if you were a director of your own limited company.
  • There are a lot of dodgy umbrella companies around that claim you can retain up to 90% of your salary, even after tax and NI deductions have been made. Beware – these are tax avoidance schemes and could get you in a lot of trouble with HMRC if you use them.
  • You are only able to claim back expenses if you are not subject to supervision, direction or control and if the expenses have been ‘wholly, exclusively and necessarily’ incurred during the course of your contract.

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What is IR35?

IR35 legislation was introduced in 2000 by HMRC to try and stop temporary workers avoiding tax by operating through an intermediary, such as a limited company (personal service company). To put it simply, HMRC deemed some limited company contractors and freelancers to be guilty of tax avoidance because they were taking advantages of tax benefits that were not entitled to employees in full-time employment.

Who assesses whether a contract is inside or outside IR35?

If you work in the public sector, your client is responsible for determining your IR35 status and your recruitment agency (if there is one) must pay you accordingly. This is why many recruitment agencies require their candidates to work via a compliant umbrella company – because everyone receives income through PAYE and tax avoidance is not possible – even by accident.

If you work in the private sector, you are responsible for determining your IR35 status. However, this will change in April 2020 when off-payroll in the private sector is rolled out.

Does IR35 apply to umbrella contractors?

If you are registered to an Umbrella Company, IR35 does not apply because you are an employee of the umbrella company and receive income through PAYE. This means you are paying tax and National Insurance like a full-time employee. Providing your chosen umbrella company is compliant (like Churchill Knight Umbrella), there is absolutely no tax avoidance going on and you have nothing to worry about!

Off-payroll legislation (private and public sector)

Off-payroll in the public sector came into effect in April 2017 and it will be adapted into the private sector in April 2020. This is going to have a significant impact on contractors, freelancers, private sector businesses and recruitment agencies. We’ve summarised the upcoming changes (off-payroll in the private sector) below.

What does off-payroll in the private sector mean for contractors and freelancers?

From April 2020, private sector organisations will be required to determine the IR35 status for each of their temporary workers. As things stand, private sector contractors and freelancers are able to determine their own IR35 status and can pay themselves accordingly (with a combination of salary and dividends if they decide they’re outside IR35).

Experts are predicting that there will be an increase in demand for umbrella companies once April 2020 arrives, just like there was when the legislation was rolled out into the public sector in 2017. This is because private sector contractors will need to have their IR35 status thoroughly reviewed by their end clients (for every new contract) and it is expected that some contractors who have previously been outside IR35, will be inside IR35. If private sector organisations wrongly assess the IR35 status of their temporary workforce, they could face penalties from HMRC. It is very unlikely they’ll take any risks.

Will I need to use an Umbrella Company after April 2020?

The answer to this is easy – not necessarily. It depends on the IR35 assessment that your client carries out on your contracts – post-April 2020. If they decide you are outside IR35, your recruitment agency can still pay you your gross salary – leaving you to make the appropriate deductions to HMRC (tax and NICs), just like before.

However, if your end client decides you are inside IR35, you may be better off closing your limited company or making it dormant and joining an umbrella company.

Off-payroll in the private sector – is this bad news?

If you take on new contracts after April 2020 which deem you to be inside IR35, your take home pay retention (%) may decrease compared to contracts you have worked on that have been outside IR35. However, it isn’t all doom and gloom.

After April 2020, it may be in your interest to use an umbrella company so that you receive your pay without any confusion and with the correct, legal deductions made to HMRC on your behalf. This will allow you to focus on your job, without having to worry about the complications that can arise when running a limited company.

Remember, you can opt to keep your limited company running in a dormant state, meaning that you can use an umbrella company for your contracts inside IR35, and use your limited company for contracts outside IR35. Please speak to us for more information on how this arrangement works – it’s far more straightforward than you may think.

Churchill Knight Umbrella Off-Payroll

What should you do if you have a limited company at the moment?

If you are contracting in the private sector through a limited company at the moment, you can still decide whether or not you are inside IR35 and pay yourself accordingly. However, be aware that if you take a new 12-month contract after April 2019, your contract will run over into April 2020 – when changes to off-payroll legislation in the private sector are in effect.

Moving forward, it is in your interest to:

  • Ask your client to give you a fair IR35 assessment
  • Negotiate a fair rate that you are satisfied with, after your IR35 assessment

IR35 can be confusing

Do I need to submit a personal tax return if using an umbrella company?

What is a Self-Assessment?

A self-assessment (or Form SA100) is HMRC’s way of assessing how much Income Tax and National Insurance Contributions (NICs) you are due to pay. As an umbrella contractor, your tax and NICs will already have been sent to HMRC on your behalf (PAYE). However, if you have any additional forms of income you will need to report this in a tax return as they will most likely be untaxed.

Here are a few reasons why you may need to complete a Self-Assessment Tax Return:

You qualify as a higher rate payer of tax

If your total annual income exceeds £100,000, you may have a higher/additional rate tax to pay that has not been already collected through your tax code.  This is because you lose £1 of your personal allowance for every £2 earned over £100,000.  Anyone earning over £100,000 is required to submit a Personal Tax Return.

You receive foreign income

Foreign income may be liable to UK tax and therefore if you are a UK resident taxpayer earning foreign income, you must complete a tax return. If the amount is under £2,000 however this does not need to be reported.

You have income from properties, savings or investments (including pensions)

If you receive rent or income from properties in the UK you have a £1,000 allowance – any income under this threshold you do not need to report. Income from savings has a threshold of £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. For any income above these thresholds, you will need to complete a tax return.

You have received payments which were untaxed

If you have sold or given away an investment or property you may need to complete a tax return and the Capital Gains Tax page (as Capital Gains Tax is due).  Capital gains tax may be due depending on how long you have owned the asset and what gain has been made.

You have income from settlements, trusts or estates

If you receive income from annual trusts, settlements, or inherit the estate of a deceased friend or relative, you must return a self-assessment as tax will be due on this income.

You or your partner receive Child Benefit and your income exceeds £50,000

If your income exceeds £50,000 and either you or your partner are entitled to receive Child Benefit, you must complete a tax return as tax may need to be paid back. Additionally, if any of the following apply you may also need to complete a self-assessment tax return:

  • If you get a similar amount from someone who claims Child Benefit and their child lives with you
  • Both you and your partner receive Child Benefit and decide to pay the new tax charge

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How to complete your Self-Assessment Tax Return

If you have not previously completed a tax return, you will need to register online first.

You will need the following information to complete your self-assessment:

  • National Insurance Number
  • 10-digit Unique Taxpayer Reference (UTR)
  • Details of all the untaxed income for the tax year
  • P60 or any other accepted records which show income you have received which has already had the tax applied
  • Evidence of expenses relating to self-employment
  • Contributions to pensions or charities which could be eligible for tax relief

There are two types of self-assessment tax returns – The standard SA100 form or the short version – SA200. You will only have to complete SA200 if it is sent to you by HMRC, otherwise, a SA100 will be required.

You will be told how much tax and NICs you are due to pay once you have completed your self-assessment tax return.

All the information you may need as well as the self-assessment forms can be accessed on the government’s website.

When is the deadline for the Self-Assessment?

You must complete your self-assessment tax return after the end of the tax year (5th April) for income earned in that tax year. The deadline for an online return is the 31st January the following year. The deadline for paper returns is slightly earlier and must be submitted by 31st October of the same year.

Penalties for missing the deadline

If you submit your tax return even one minute late you could face a penalty of £100, and it will continue to increase after this time. Interest is also charged on late payment of tax due. It is possible to appeal against a penalty if you submit your tax return after the deadline and have a reasonable excuse for doing so. Further information on how to appeal a penalty and what is considered by HMRC as a reasonable excuse can be found on the government’s website.

Our personal tax team has completed over 10,000 self-assessments since 1998.

Understanding an umbrella company payslip

An umbrella company payslip can often be confusing and many contractors find it challenging to understand the deductions that have been made. There are three key differences between operating through an umbrella company and being paid as a permanent employee – umbrella employees will see additional deductions for the Employers National Insurance Contributions, the Apprenticeship Levy and the umbrella company’s margin.

The following guide will provide you with a detailed explanation of a compliant payslip from an umbrella company. We will explain all of the deductions.

Umbrella Company Payslip

When you start contracting through an umbrella company, you become an employee of that umbrella company. This means you will receive a monthly payslip which will show your salary prior to any tax deductions, your salary after tax deductions, the fixed deductions and the variable deductions (tax and NI contributions).

Having a full payslip history is beneficial to you as a contractor as it can be provided as references for credit, loans or a mortgage.

You will notice on your payslip that Employers NI and Apprenticeship Levy deductions have been made. In permanent employment, the company you are working for is liable to pay these contributions. However, whilst the umbrella company is seen as your employer (for tax purposes) they are not benefitting from any of the work you carry out, therefore, these deductions are passed on to you. However, these deductions should not eat into your take home pay as your recruitment agency should uplift your salary (if you are offered the option of working through an umbrella company). This is to take into account the deductions for the Apprenticeship Levy (0.05%) and Employers NI (13.8%).

An umbrella company payslip will include the following sections:

Payments

This section will outline your salary, holiday pay and any additional payments such as overtime, maternity or sickness pay. It is a legal requirement for umbrella companies to pay you holiday pay so a proportion of your salary is either allocated as holiday pay or is held back (on your request) and paid to you in a lump sum.

Holiday

It is worked out at 12.7% of your hourly rate. Most contractors choose to have their holiday pay paid to them along with their salary each week. However, it is possible for umbrella companies to withhold your holiday and give it to you in a larger lump sum at the end of your contract. Some contractors see this as a way of helping to save for a small fund for a rainy day.

Deductions

This section will show all the Income Tax, NI contributions and pensions payments (if you are paying into a pension scheme) that will be deducted from the current pay period.

This Period

You will be able to see your Total Gross Pay (salary before deductions) and how much tax is being deducted from your salary.

Net Pay

Net pay is the salary (after deductions have been made) that you can expect to be paid directly into your bank account.

Year To Date

This shows you the total amount of tax you have paid to date, along with your Gross Pay.

The Reconciliation Statement

This is an exact breakdown of the Apprenticeship Levy, Employers NI, umbrella company’s margin and any pension deductions that have been made.

Example of an umbrella company’s reconciliation statement and payslip

Churchill Knight Umbrella Example Of A Reconciliation Statement

The following figures have been reached by using the calculations below. Please note that the payment information has been made up entirely for the purpose of this illustration:

  1. £1575.00 is the contractor’s salary prior to any deductions.
  2. The company costs will then be deducted from the contractor’s pay.
  3. £1575.00 – £347.52 = £1227.48 is the contractor’s Gross rate of pay ready for the tax to be deducted.
  4. Holiday pay is shown as a separate payment and a proportion of your salary. It will never be deducted unless you request the umbrella company to hold it back for you.
Churchill Knight Umbrella Payslip
  1. £1227.48 + £148.16 = £1375.64 is the contractor’s salary (gross for tax) prior to employee tax and NI deductions
  2. The Employee’s Tax and National Insurance Contributions combined is £423.37
  3. The employer’s tax and NICs are deducted from the gross for tax salary to get to the net pay which is the final amount the contractor will take home: £1375.64£423.37 = £952.27

 

Working through an umbrella company is the easiest way to get paid

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Frequently Asked Questions

Why am I paying into a pension?

Everyone is automatically enrolled into a workplace pension. After 12 weeks you are able to opt out if you do not want to be paying into a pension scheme.

Why am I paying two lots of National Insurance Contributions (employers and employees)?

As your payroll is outsourced to a payroll company you have to pay both the employers and employees NI Contributions. This is because whilst you are doing the work for your client you are not technically employed by them, so they will not pay the employers NI. The umbrella company will also not pay the employers NI (even though they are technically seen as your employer for tax purposes), as they are not benefitting from any of the work you do. Consequently, the employers NI is passed on to you.

Your recruitment agency should uplift your rate to cover these additional deductions. A full breakdown of the uplift, deductions and what you are due to be paid is shown on your payslip.

Why doesn’t my pay match the illustration I was given?

The illustration is only an estimation and should only be used as a guideline to show you how much you could take home. As an umbrella company, we can never give you exact figures until payroll is actually paid to us.

Why am I paying so much tax?

If you haven’t sent in a P45 then you will be put on an emergency tax code until you send in your P45. HMRC could also have sent us a tax code to use and if you think this is incorrect you need to ring HMRC to change it.

Where’s my payslip?

Due to changes in GDPR regulations, it is no longer possible to email out payslips. You can access your payslips at anytime via the online portal and they will be uploaded no longer than 12 hours after your pay has been processed.

What time will I be paid?

It can take up to the close of business to process your pay. Once funds have been received from your recruitment agency, we are able to process it and you will receive a text letting you know when you have been paid. On a Friday, 70% of payments are made in the morning.

Why is holiday pay showing on my payslip?

For legal reasons, a percentage of your pay needs to be shown on your payslip as holiday pay. This is never actually deducted from you and will be paid to you along with your salary each week.

Still have unanswered questions? Check out our FAQs.

Benefits of using Churchill Knight Umbrella

Churchill Knight Umbrella is backed by 20 years experience so you can rest assured that we are 100% compliant with all of HMRC’s regulations. All of your tax deductions will be made in accordance with UK tax laws – you won’t be receiving any unexpected tax bills. Churchill Knight Umbrella can offer the perfect payroll service for you regardless of your experience as a contractor or the industry you are working in. Our umbrella service is ideal for contractors or freelancers who are working in the public sector, on a short term assignment or are contracting for the first time. We will minimise the administrative burden associated with contracting, leaving you with more time to focus on the work you love!

Additionally, as Churchill Knight employee you will be given exclusive access to our rewards scheme. Our employee reward scheme gives you discounts to thousands of online and high street retailers – you could save hundreds on purchases!

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Contact us for more information

Give our team a call today on 01707 871622 to discuss how Churchill Knight can help you with all your umbrella payroll needs. We can provide you with a free consultation to discuss your payroll options to ensure you find the most suitable solution.

Disclaimer

This webpage is being provided to you solely for your personal information. It is not intended for distribution to the press or any other media and may not be reproduced or redistributed by mail, facsimile, electronic or computer transmission or by any other means to any other person or body without the express written permission from a Director of Churchill Knight Umbrella Limited.

This document is not a substitute for specific legal, accounting or other professional advice or opinions on related matters and issues that arise and should not be taken as providing specific advice on any of the topics discussed.

The information contained herein has been prepared by using sources believed to be reliable. Whilst reasonable care has been taken to ensure that the facts stated herein are accurate, no representation or warranty, express or implied is made by Churchill Knight Umbrella Limited, with respect to completeness, correctness, reasonableness or accuracy of any information and opinions contained herein.

Without limiting the generality of the foregoing, liability for any negligent or innocent statement or misstatement in respect of the contents of, or any omission from this document are hereby expressly excluded. Churchill Knight Umbrella Limited has no obligation or liability whatsoever with respect to the information provided or any action or inaction of Churchill Knight Umbrella Limited or the recipient with respect to such information.

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We have over 20 year’s experience in the contractor payroll industry. Please complete the form below or give us a call on 01707 871622 to find out more information about umbrella companies. We can provide you with an instant take home pay calculation – if required.

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